How Long Does It Take To Pay Off a Skyscraper?

This question originally appeared on Quora.

Answer by David S. Rose, entrepreneur, investor, mentor

Skyscrapers are not typically “paid off” for the same reason that many people still have mortgages on their homes long after the original 10, 20, or 30 year mortgage would have been fully amortized. A loan backed up by tangible, long-term, income-producing, assets is usually a pretty safe bet to be repaid,  and therefore the interest rate paid by the borrower is relatively low. Most other potential uses of the money, therefore, should be both riskier and more profitable. As such, taking out a “home equity loan” (aka a mortgage) at, say, 4 percent and putting the money into your investment account, where you might be able to earn 6-8 percent, for example, is often a smart thing to do.

Similarly, most commercial office buildings (skyscrapers) are typically financed by the developer taking out a relatively expensive, short-term construction loan (to build the building) backed up by both a personal guarantee (from some entity the lender believes can repay it if necessary) and a completion guarantee (from some entity the lender believes can finish the project once it gets started).

When the building is completed (by getting its Certificate of Occupancy and/or being fully leased up), the owner gets a cheaper, long-term mortgage on the now-finished building, which is a) used to pay off the construction loan, and b) serviced by the rents paid by the building’s tenants.

After a number of years have passed, several things are likely to have happened: 1) the mortgage has been significantly paid down; 2) the value of the underlying building has increased; and 3) the owner has waited for a time in the economic cycle where mortgage rates are low. At that point she will “refinance” the property by taking out a new mortgage for a higher amount at a lower rate, pay off the original mortgage, and put the balance to work somewhere else where it can make even more money. This cycle continues in perpetuity, using hard assets to leverage new investments.

Now that we’ve learned all about real estate finance (which answers the first part of the question), we’re going to forget all that in order to answer the second part of the question.

The World Trade Center was a quasi-governmental project, built by the Port Authority of New York and New Jersey, and financed by government bonds backed by the building’s revenues.

In an unusual twist of fate, almost immediately prior to 9/11, the Port Authority had sold the Twin Towers to a private New York development group led by long-time New York developer Larry Silverstein. They, in turn, took out a new mortgage to finance the purchase, backed by the building’s rent roll.

Bad News: No sooner had the ink dried on the bill of sale, then along comes Bin Laden and eliminates the underlying asset, triggering the mortgage lender to demand its money back.

Good News: Silverstein had insured the buildings.

Bad News: They were insured up to a maximum of $1 billion per incident.

Good News: Two separate planes, two separate buildings, two separate incidents.

Bad News: Insurance company goes to court, claiming one terrorist organization, one coordinated attack, one incident … and they win.

Good News: The Silverstein group still has the ground lease for the site (as well as the payments to the Port Authority that he still owes), so they are the ones building and owning the replacement tower there, for which they had to get a construction loan, and, when finished, a mortgage.

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